Note — This is the first in an anticipated series of articles for laypersons about basic matters of the law of corporations and other business entities. They may also make interesting reading for those with more knowledge. Every now and then it is good to go back to the basics.
“Did you ever expect a corporation to have a conscience, when it has no soul to be damned, and no body to be kicked?” — First Baron Thurlow Edwards
What are corporations? Even those who don’t work with them hear about them a lot. They send most of the bills we pay. They open up new factories overseas. Sometimes one corporation buys another corporation. Sometimes we even talk about them like they are people. But they are not like any human person you’ve ever met — you can’t shake their hand, nor can you “kick” their “body” (as Baron Edwards lamented).
One answer is that a corporation is an idea. Ideas can be powerful things, even though they don’t physically exist. Money is only green pieces of paper. Yet people will do all sorts of things to get it, because money is an idea that everyone has in a sense agreed to share, that these little green pieces of paper can be exchanged for other things we want, like doughnuts, cars, or houses. Similarly, the law and society have agreed to treat corporations, for certain purposes, like a human person.
In fact, a better question than “What is a corporation?” is “What is a legal entity?” It doesn’t have as much ring to it (and the word “entity” might bring to mind a ghost or a Star Trek episode), but it is a better question because a corporation is only one kind of legal entity. Other kinds are partnerships, limited liability companies, and trusts — to name a few.
Legal entities are fictional legal persons. They have their own identity in the eyes of the law, for a number of purposes. So when a corporation is running a business, like your telephone (or cell phone) company, for many purposes it is the corporation that is sending the bill, not each of the people working for it. Even those who run or supervise it like its president or one of its directors.
And, like different people, different legal entities have their own characteristics. For example, many legal entities, including corporations, have a feature called limited liability. That is, the owners of a corporation (its stockholders) are not ordinarily liable for its debts if the corporation should fail. That is a very helpful feature for investors, who are interested in paying $200 or $400 for a few shares of the next Microsoft — but don’t want creditors coming after their cars if it turns out to be the next pets.com.
Also, because the corporation or other entity is the business and not any of its employees or managers, they generally aren’t responsible for a corporation’s debts either. Most (but not all) business entities are themselves taxed on their income, rather than their owners being directly taxed for that income.
It is these features that Baron Edwards possibly had in mind when he complained that a corporation has no body to be kicked and therefore cannot be expected to have a conscience. But while a corporation itself is only an idea, and can’t think or do anything for itself, those who run and work for it can — and should — have the “conscience” to which Lord Barlow refers.
There are various ways the law has of motivating individuals (or “natural” persons) to not use the corporation as a tool to misbehave, or to fine or punish them if they do. For a manager to make a business mistake in choosing a business model, causing the corporation to fail, is one thing. Causing a corporation to dump toxic waste in the local river or pay bribes to government officials is another thing. There are certain misbehaviors for which a corporation’s managers or employees can be sued or even criminally prosecuted for, even though they were working for the corporation on its business. Also, managers and officers of a corporation have what is called a “fiduciary duty” to the corporation, and if they disobey that duty, causing harm to the corporation and thereby its stockholders, under certain circumstances and in extreme cases they can be sued for damages or other remedies.
Much of corporate law is set up to preserve a tricky balance: preventing and redressing misbehavior, on the one hand, but at the same time encouraging business innovation and risk taking. Risk-taking doesn’t always work out, but when it does can produce companies like Microsoft and innovations like new medicines and other technologies, which benefit everyone.
Filed under: Basic Law of Corporations
Delaware Corporate Law Update 